'No decision yet, to stop bond purchases through OMO: Gokarn

The Reserve Bank of India (RBI) today assured market participants that bond purchases under open market operations (OMOs) have not been discontinued and are very much on the table.

“We have not put a stop over OMOs by any means, they are still on the table,” Deputy Governor Subir Gokarn told reporters on the sidelines of an investor meet on Wednesday.

The central bank's purchases of government bonds through OMO auctions would depend on liquidity conditions, Gokarn said.

Bond traders feared that the absence of bond purchases by the RBI this week meant an end of its bond-buying programme for the financial year.

The RBI typically announces OMO auctions on Tuesdays and the tender is conducted on Fridays, alongside the government bond sale tender.

RBI looks at banks' borrowings from its daily repo tender and the movement of the call rate to decide on OMO auctions, the deputy governor said.

Although banks' borrowings from the repo tender have come down, liquidity deficit is still outside the central bank's comfort zone, he said. The fall reflects the impact of the cash reserve ratio cut and previous OMO bond purchases, Gokarn said.

“It (liquidity) is still outside our stated comfort zone of 60-65 (Rs 60,000-65, 000 crore) but there has been a steady decline in that number after we announced the CRR cut," he said.

The RBI had cut the CRR by 50 basis points in its third quarter review of monetary policy 2011-12 (Apr-Mar) on Jan 24. The CRR cut straightaway increased banks' liquidity by Rs 32,000 crore.

Borrowings from the repo tender on Monday and Tuesday declined to below Rs 1 lakh crore compared with more than Rs 1.2 lakh crore daily average borrowings in the last week.

So far in this financial year, the central bank has purchased Rs 80,700 crore rupees worth of bonds through open market operations.

Bond purchases are not to manage bond yields but are purely a liquidity tool, Gokarn reiterated today.

Speaking about the call money rate, he said that the spread between the overnight rate and the repo rate has shrunk, reflecting improvement in liquidity conditions.

The call rate was trading at 8.60-8.65 per cent on Wednesday, at a spread of 10-15 basis points over the RBI repo rate.

Besides a cut in CRR and open market operations, the central bank can infuse liquidity through dollar purchases, Gokarn said.

However, any intervention in the foreign exchange market would be to manage volatility and not liquidity, he said.

Using forex as a tool for liquidity management is theoretically possible, but the RBI would intervene with the objective of smoothening volatility in the currency market and not to manage systemic liquidity, he said.